‘Cost of finance is high in Nigeria’

Emeka Ene is the Managing Director, XENERGI Nigeria Limited and Chairman, Petroleum Technology Association of Nigeria (PETAN). In this interview with Emeka Ugwuanyi, Assistant Editor (Energy), he speaks on the need to support independent oil producers, the dearth of funds and high lending rate by the financial industry. He stresses the importance of local content fund and stakeholders’ support to ensure security in the Niger Delta region, among others.

It seems indigenous firms have taken over control of the service sector?

I don’t think it is a take-over. When you say takeover, it seems the glass is half full and filling up. The fact is that hydrocarbon energy is a continuous process and the developed economies of oil sectors of the world, such as the United States have their own position on the search for hydrocarbon. Everybody has his own position. What has happened is that we have seen a transition where the hope of emergence of the Nigerian independents are truly coming into life and that gives the impression that there is some kind of takeover. The fact is that it is even in the interest of the major multinational companies to have independents exist because in areas and assets where they cannot produce them efficiently, they actually can farm out these areas to independents who can do them quicker, faster and cheaper. So I think what is happening is a transition to the emergence of the Nigerian independents, which I think, can co-exist side by side with the major multinationals.

The local firms were some time ago asked to partner with the multinational oil companies. How has the partnership worked?

The concept of partnership is when two parties bring something to the table. What has happened is that Nigerian companies suffer from major liability, which is access to long term low-cost capital. That has been a major millstone limiting the growth of these companies. Most of these first generation companies were started by people who were technocrats but they lacked the funding to do it. There are some factors that had militated against some of these partnerships from taking off. One of them is that the contract cycles are very short. For instance, you borrow $100 million to buy a vessel and two years later, you lose the contract. That puts you out of the limb and it has been a major factor behind all the partnerships from surviving the test of time. The fact is that many of them were designed to fail because they were not bankable.You cannot borrow money that you cannot recover within the period of a contract and expect that company to last the test of time. What has happened is that with the Nigerian Content Law, it is given a wider scope for companies to build economies of scale, which is what we need for the oil and gas business. You cannot do it by running a hand to mouth operation. You may start that way but the opportunities to grow your business have to be there. What happened is that we have gone beyond the partnership that started this process and expanded to developing capacity by ramping up collaboration. People are now collaborating without necessarily merging into one.

You identified funding as a major problem and we have seen the recapitalisation and consolidation in the banking sector; didn’t the policy have positive impact on funding issue?

Banks have money to lend, but the thing is that the banking sector was driven by trader mentality; that is, buying and selling mentality. But the oil and gas business is not driven by buying and selling mentality, it is driven by the mentality of a process that you invest and watch that business grow over time. Some banks play in this industry on short term basis. And where a man doesn’t have an option, he borrows the money anyway. But, of course, at the end of the day, he ends up working for the bank. What is happening is that banks have started to lend for longer term and have started to see single digit lending rate, dollar base and longer term. The Nigerian Content Development Monitoring Board (NCDMB) has also stepped in to provide succour through the Nigerian Content Fund where you can get much lower interest rates and much longer tenures. That is the only way because if I need to put up a factory, it cannot be for a two-year contract, it should be a 15 to 20-year fund. But no bank can lend you money for that long because it wants to make the bankability of the project work. But what happens is that the NCDMB, working with PETAN, is trying to create the basis for lending money longer term so that people can build real capacity in the country and not just masquerading as a Nigerian company when it is actually not producing anything.

There is the tendency of local firms going for foreign technical and funding partners. Why can’t your members go for such partners?

In fact, it is happening but maybe it is not being publicised. There is a lot of foster partnerships going on and even with the International Oil Companies (IOCs). We need to encourage what we call virtual partnership where they give an alliance contract to a number of Nigerian companies to contribute the equipment that they have to create a larger entity. This is something that is happening. But people can easily say partner, merge but partnership and merger are natural cause of events. I think it will be tragic to see a Nigerian company that has invested a lot of money into a fabrication plant and that plant is idle and there is another company that doesn’t have the ability to meet the demand. What we are trying to do is cluster them. Within the Petroleum Technology Association of Nigeria (PETAN), we are trying to do what we call Technical or Technology Interest Groups (TIGs). What happens is that people in the same type of business within PETAN, cluster them together in such a way that when opportunities come we encourage them to work in an alliance, so that their capacity is larger than the individual capacities.That is something that we think that we can take to the industry and make it more of a norm and practice as well.

We have seen a trend where service providers, such as PETAN members re integrating exploration and production, for example, Nestoil. How would that actually impact on their capacity and capability to excel in the two areas given the huge funding demand in E&P?

There is what we call high bill financing model, which was pioneered by one of the marginal fields’ operators called Energia. Coming from a service background, although from a technical point of view, you have to keep it an arm’s length. The fact that you have some components within your integrated portfolio enables you have access to services that you may not ordinarily have had access to by giving you low cost. Oil price has been moving around $100 per barrel for years. All businesses have been busy worldwide and equipment is in short supply. So when you have companies such as Nestoil and others, upward integrate as it were, they also have competitive advantage to provide some of the services because they are readily available. It is really like a worldwide web, things are opening up, and those who are on ground are those who are taking advantage of it.

Some of the service companies complain about poaching of skilled manpower. How are you managing this trend?

This is a major concern. PETAN companies and other Nigerian companies have invested a lot of money in training people from scratch and what happens is that they come and they are poached. Not even poached in a sensible manner because we have a PETAN member whose 25 members of staff were poached from one department and he had to shut that department. He started that department almost 15 years ago and most of the people poached are not put into productive use after all. So, as far as we are concerned, it was a predatory competitive move to take out the competition. What we are trying to do through the NCDMB is to encourage the free movement of labour and also impose an obligation on companies, particularly international service companies to make investments that are commensurate that match up how much they are taking out of the economy and what they are putting in. In other words, they should start pupilage and internship programmes so that for every one person you have poached, you have trained 10 of them, so that you are not just creaming up the top and crippling Nigerian companies and preventing them from developing. We are not stopping free flow of labour rather we are encouraging it but the industry should develop. We don’t want to recycle the same people. We want to give opportunity to fresh people to learn from the job but not at the expense of PETAN companies or Nigerian companies but at the expense of the technology companies, which need to invest in that respect also.

What is your association doing to make the government and National Assembly pass the Petroleum Industry Bill (PIB)? Or are there enough jobs for your members?

The Nigerian Content law has opened up the playing field, but I can tell you that we are still far from Uhuru. We have a new phenomenon, for example, people dressing up in coat of many colours as it were and masquerading as Nigerian companies. We don’t have a problem of people investing here in Nigeria. What we want to do is to create real jobs and capture know-how so that the economy can open up. This is something that we will certainly attack in a collaborating manner. In other words, the IOCs are actually champions of trying to develop the Nigerian Content in the sense that they want to see real Nigerian Content.They want to see efficient services, technology available when they need it and executed in a straightforward manner at a minimum cost. This is what every business man wants. What we are trying is to ensure real investment, real jobs being created, and real know-how being transferred rather than just masquerading.

Some of the challenges that didn’t allow local content to come up early enough, such as technical challenges, finances, which are being tackled. Are they creating commensurate value in-country?

I can only speak for quite a number of PETAN companies. Banks have started to understand the life cycle of oil and gas business a bit better.They are beginning to match the funding to the life cycle. But that is not to say that we are competitive. Our banks are not competitive because they are competing against other global players. For instance, you cannot compare them to a Norwegian bank that can lend less than two per cent interest rate and Nigerian companies are borrowing money at 30 per cent in real terms even in dollars. Although they say it is 10 per cent, by the time you add up all the bank charges and others they call country risk, it is quite enormous. However, we have come a long way from where we were 10 years ago. In terms of value addition, I can tell you that the comment I had from a banker at this conference is that when they started to fund oil and gas business and started seeing the returns, the treasurer called and asked where the money was coming from? Is it drug money, he asked. Because he has not been seeing such returns because the money was going somewhere and now they are lending the money to oil and gas. The returns are coming through the banking system and into significant way, in dollars, which they were unable to get in the past. So, it is a win-win for the banking system, the service and operating companies because you now have the funding circulating in the local economy. Even the little food canteen operator by the road side feels the impact when a Nigerian company is operating. It is so because where the Nigerian company operates, workers walk across the road to have their meals whereas if it is not a Nigerian company, they package the meals from abroad to feed the workers. It helps the economy and employs Nigerian nationals who have relatives in the village. So, it has ripple effect. The impact is much more when the investment is through the country rather than looking for the cheapest things.

The NCDMB said it is carrying out a pilot scheme with some of PETAN member-companies to see how the content fund works. How is the scheme playing out? Also, is PETAN collaborating with NCDMB on building industrial parks in the Niger Delta states to enhance the skills of their workforce?

In case of the pilot, it is a pilot financing from the Nigerian Content Fund. It has been a slow process, slower than we anticipated simply because they have been educating the banking industry on the unique structure of oil and gas projects. We wanted to get it right from the first time but essentially it is on track.The NCDMB is partnering with PETAN to see how this can be rolled out. We expect that the pilot will be in place by the end of March and from there other companies can tap into the Nigerian content try some contracts and be able to fund their contracts with lower cost finance. The industrial parks initiative that was announced by the Executive Secretary, I think it is directed at the grassroots entrepreneurship and grassroots manufacturing and the idea is to force some of the investments at the grassroots where it matters. For instance, simple nuts and bolts, most of them are imported. I believe 100 per cent of them are imported, but the technology for manufacturing nuts and bolts is not rocket science. So, by going to the grassroots and creat-ing these industrial parks, the idea is to create that enabling environment. However, PETAN’s position is that for such initiative, NCDMB needs to to carry along those such as PETAN because with private sector involvement, it would work better because we know where it pinches. Whatever is the good intention, you find out that for sustainability you need to give it to private sector to drive, otherwise, it would only work for the opening ceremony and after that it ends there.

In spite of the enablement from the Nigerian Content Law, your members complain about the long contracting period. How is your association engaging the government on that?

This is a big challenge for us. We have some of our members who bid for work in 2002 and they were given the contracts in 2012 and they are being told to use the same price they offered 10 years ago. We have heard this story over and over again. Now, the reality is that the contracting cycle needs to be shorter for a simple reason that the industry worldwide is busy. Therefore, you will have the service at a decent price if you begin to allow it to go out of hand. It has not been a good decision and it is systemic problem. Systemic in the sense that between the IOCs and the government and other stakeholders, there is nothing that has not been said to remedy the situation. NIPEX has done a lot to streamline that process but I think PETAN as a group is advocating both at the NIPEX, government and the IOCs’ levels. Not just in terms of processing contracts shorter cycle, but also in terms of having longer cycles in specific areas. So, why do you need to have two-year contract on major projects and why don’t you have five-year contract, which will allow investors so that you can build real capacity? It is a challenge for the industry and one that everybody faces. Nobody is comfortable with it.

What is your organisation doing to integrate the ex-militants into the industry to stem insecurity?

PETAN member-companies and Nigerian oil and gas service companies are on the frontline. We are the people that are first to be kidnapped, but it is very interesting that when the heat was on throughout the militancy period, it was PETAN companies and others that saved the day. Many times even the oil companies were helpless but they would approach the service companies and say that zone there is no-go-area but if you can go there and do a job, we give it to you. PETAN companies went there and managed the process because at the end of the day you find out that everybody has the same aspiration – have a good life, provide for your family and move on and train people coming after you. Sometimes odds are against people and they go with the options they have. We recognised that and felt that a lot of things were as a result of absence of knowledge and expertise. If you don’t have skills, there is not much you can do. To a large extent, that should be the spearhead of NCDMB to ensure expertise goes through. When you have a skill and the tools, you will not put your life at risk everyday. You will find a productive way to live. It is absence of all these that led to creation of militancy. There are some issues in your question that are outside the scope of PETAN to answer, but we can only do so much. However, all stakeholders have to come to the table to agree.